The case against the case against insider trading

When the Securities and Exchange Commission accused Steve Cohen of failing to reasonably supervise employees at his hedge fund who the government says engaged in insider trading, a spokesman for SAC Capital said the charge has "no merit."

His outside counsel, Dan Kramer, went even further.

"The press speculates about a lot of things in this case, but one of the possibilities that the press doesn't engage in is the possibility that Steve Cohen didn't do anything wrong. We believe the evidence will show he did nothing wrong," Kramer said.

What they didn't dare to do, however, is challenge the basic premise underlying the government's long investigation of SAC Capital—the notion that insider trading should be regarded as a violation of securities laws and its perpetrators hounded out of securities markets, even jailed.

But this is something worth challenging.

The case for deregulating insider trading goes back to 1966, when a legal scholar named Henry Manne published a book entitled "Insider Trading and the Stock Market."

Manne argued that the various rationales given for banning insider trading don't hold up to scrutiny. What's more, he pointed out that insider trading actually is socially beneficial because it causes stocks to trade at prices that reflect more information. That leads to better capital allocation and less stock market volatility. (Stephen Bainbridge has a good summary of Manne's argument in this paper.)

This initially shocked academia. In the intervening years, Manne's position has won enough adherents that it is no longer outside the mainstream in legal and economic scholarship. But to the public, it is still novel and somewhat scandalous.

In this week's NetNet TV, I defend the indefensible once more, arguing that insider trading is a victimless crime that should probably be legalized.